US Dollar Index weakens to near 96.50 as Retail Sales stall, all eyes on US NFP data

US Dollar Index edges lower to around 96.65 in Wednesday’s early European session.
US Retail Sales unexpectedly stalled in December.
All eyes will be on the delayed US employment report for January, which is due on Wednesday.

Lallalit Srijandorn FXStreet

The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, trades on a weaker note near 96.65 during the Asian trading hours on Wednesday. The delayed US employment report for January will take center stage later on Wednesday.

Data released by the US Census Bureau on Tuesday showed that US Retail Sales remained unchanged at $735 billion in December. This figure followed the 0.6% rise seen in November and came in below the market consensus for an increase of 0.4%. On a yearly basis, Retail Sales rose 2.4% in December, versus 3.3% prior.

The downbeat US Retail Sales reading bolstered the case for the Federal Reserve (Fed) to lower interest rates this year, which exerts some selling pressure on the US dollar broadly.

Traders await the release of the US jobs data on Wednesday, which might offer some clues on the US interest rate path. Markets estimated US Nonfarm Payrolls to have risen by 70,000 in January. The Unemployment Rate is seen holding steady at 4.4%. Any signs of improvement in the US labor market could help limit the DXY’s losses in the near term.

“Upcoming jobs and inflation data represent a critical crossroads for the Fed – and for near-term market sentiment,” said Keith Lerner at Truist Advisory Services. “Markets are searching for confirmation that growth is slowing just enough to justify further policy easing, but not so much to risk breaking.”

US Dollar FAQs

What is the US Dollar?

The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.

How do the decisions of the Federal Reserve impact the US Dollar?

The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.

What is Quantitative Easing and how does it influence the US Dollar?

In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.

What is Quantitative Tightening and how does it influence the US Dollar?

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.

Author

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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